late capitalism

China’s Sweeping Crackdown on Big Tech Is a Wake-Up Call for the U.S.

Communism is back, baby. Photo: CHINE NOUVELLE/SIPA/Shutterstock

The tech giants have grown so powerful that they’ve become a threat to the market’s dynamism and the state’s sovereignty. The gig workers have grown so tired of receiving low wages and no benefits that they’re going on strike. Inequality has grown so vast it’s starting to threaten social stability.

The ever-rising costs of health care, housing, and education are depressing middle-class living standards — and thus, birth rates. Families must purchase real estate in select jurisdictions in order to access high-quality schools. The disparate economic fortunes of urban centers and rural hinterlands are fueling political unrest. Even as the nation faces pressing investment needs and game-changing technological opportunities, the private sector is funneling capital toward the creation of productivity-reducing social-media apps and socially useless financial speculation.

This is a litany of American economic problems. It is also a litany of Chinese ones.

There is no parity between the world’s top two powers. The U.S. is a fading hegemon, while China is still a middle-income country; the former’s per-capita GDP remains 6.5 times greater than the latter’s. China faces economic challenges that America doesn’t (i.e. escaping the so-called “middle-income trap” and transitioning from export-led growth to the consumer-driven variety). Nevertheless, the two nations share many of the same economic woes. And there is an increasingly vast disparity between the American and Chinese approaches to alleviating them. This growing divergence could have profound implications for the future of both U.S.-China relations and American domestic policy.

China’s crackdown on big tech, explained.

That a one-party communist state and the most laissez-faire of all Western liberal democracies tackle economic management somewhat differently may go without saying. But over the past year, China has grown markedly less accommodating of free(-ish) enterprise.

Xi’s ongoing crackdown on big tech is the most conspicuous manifestation of this shift. For decades, Beijing had emulated Silicon Valley’s model of innovation, cultivating tech firms that first mimicked — and then, in some respects, surpassed — Palo Alto’s champions. These companies brought their nation prestige and foreign capital. Like their American models, however, China’s tech giants also subverted regulations, abused consumer data, and engaged in anti-competitive practices. What’s more, some won themselves legions of admirers who had more reverence for their power and services than for those of the state.

Take Jack Ma, founder of the e-commerce giant Alibaba. An English teacher turned multi-billionaire, “Daddy Ma” is an aspirational icon to millions of Chinese citizens and a global symbol of his nation’s entrepreneurial gifts. Last October, the celebrity businessman used his megaphone to challenge state policy. In an address to the Bund Financial Summit, Ma lambasted the government’s “outdated supervision” of financial markets, arguing that its excessively stringent capital requirements reflected a “pawnshop mentality” that stifles entrepreneurs.

When America’s superstar firms challenge their government’s regulatory sovereignty, Uncle Sam will often rewrite the law books to fit their tastes. If Washington is in a populist mood, however, adversarial entrepreneurs can expect a tongue-lashing on C-SPAN and a yearslong investigation that might yield a fine of negligible size.

With Ma and his fin-tech firm Ant Group, the Chinese Communist Party (CCP) took a different tack. Days before Ma’s company was set to go public (in the largest IPO in world history), the China Securities Regulatory Commission summoned the billionaire to a meeting. The commission informed Ma that many of his firm’s defining features were illegal. Going forward, the lending platform would need to abide by roughly the same capital and leverage restrictions that traditional banks do. Ant would need to provide the government with regular updates on its progress toward “rectification.” Any new initiatives would need regulators’ rubber stamp.

Ant’s IPO was abruptly canceled. The company lost $70 billion in value. Ma all-but disappeared from public sight. In April, the government hit Alibaba, Ant’s parent company, with a $2.8 billion fine for antitrust violations. And Xi Jinping’s big tech crackdown had only just begun.

Ant and its rival Tencent had built massive user bases as a result of the strength of their digital-payment apps. But they had built their valuations on funneling those users into more profitable financial services, such as lending and asset management. The government forbade such “improper links” between disparate businesses on antitrust grounds. To further prevent tech giants from leveraging network effects into market dominance, regulators prohibited firms from blocking links to other companies’ sites and products on their platforms, and ordered Tencent’s music division to forfeit its exclusive streaming contracts.

Meanwhile, Beijing unveiled new data-privacy protections for Chinese consumers. Under the Personal Information Protection Law, tech firms must secure users’ consent before collecting their information and allow users to withdraw that consent at will. The law also requires tech companies to get the government’s approval before transferring Chinese citizens’ data to foreign territories.

Didi, China’s top ride-hailing service, flouted the government’s concern for data protection. Regulators asked the company to delay its IPO in the United States, so as to conduct a thorough investigation into the security of its network. Didi declined; China’s Uber went public in June. Days later, the government barred new users from signing up for Didi and had it removed from all of the nation’s app stores. The firm’s shares swiftly plummeted.

Meituan, China’s largest food-delivery app, attracted public ire for exploiting its workforce and strong-arming food vendors into exclusivity agreements. The government recently launched an antitrust investigation into the latter practice, while ordering the company to start paying its workers at least the local minimum wage, provide them with social insurance, and ease delivery deadlines. Meituan proceeded to lose $60 billion in market value.

But regulators saved their sharpest knives for the ed-tech sector. China’s cultural commitment to education, combined with the gargantuan gap in living standards between those who test into its meritocratic elite and those who do not, had created a vast market for online tutoring companies. In 2020 alone, such startups raised $10 billion. Last week, Xi’s government prohibited such firms from going public, accepting foreign investment, and … making profits. Which is to say: China outlawed one of its fastest-growing industries overnight.

Xi’s antitrust policy is progressivism with authoritarian characteristics.

These moves stunned investors and commentators. The CCP’s brand of capitalism had never been Milton Friedman’s. But it had been decades since the party had displayed such communist characteristics. Most confounding was that Xi’s government wasn’t just interfering in markets to a novel degree but was doing so in a manner that helped U.S. tech firms retain their supremacy over Chinese rivals. Beijing was slaughtering its own “unicorns.”

Surprise at the scope of Xi’s regulatory campaign is understandable. Bafflement about its rationale is less so.

Late last year, Xi declared that 2021 would mark the beginning of a “new development phase,” one that would privilege national security, “common prosperity,” and social stability over unfettered growth. The government’s crackdown on big tech is consistent with that vision.

The crushing of Ant Group’s IPO may have had a retributive element. But the firm was operating a vast financial empire built on abetting easy lending practices with little public oversight. Regulatory intervention was justified, even under a Western capitalist paradigm. In any case, China did not actually exterminate Ant; investors are still valuing the humbled firm at $150 billion.

Similarly, the antitrust case against Tencent and Alibaba was stronger than the one against Google and Amazon. As Martin Chorzempa of the Peterson Institute notes, Tencent had barred users of WeChat from sending links to Alibaba’s e-commerce sites, while both giants had coerced smaller merchants into signing exclusivity deals in order to gain access to their platforms. The countermeasures taken by Chinese regulators on this front were no more radical than those embraced by populists on Capitol Hill. And much the same can be said of China’s confrontation with its food-delivery industry. Beijing’s antitrust offensive is more exceptional in its swiftness and scale than in its substance.

The sudden liquidation of the online tutoring sector is another matter. So profound a contravention of capital’s prerogatives is unimaginable in the United States. But it is of a piece with Xi’s new development model — or, as Bloomberg has described it, his pivot to “progressive authoritarianism.”

Education inequality is among the most explosive issues in China. Parents in low-income and rural areas resent their children’s relatively poor prospects for upward mobility. Middle-class parents in major cities, meanwhile, find themselves locked in a kind of arms race, exhausting their household budgets in order to keep pace with their peers’ spending on private tutors. The ed-tech industry had capitalized on these discontents, at times through fraud and misleading advertising. But even the most ethical of these firms still fueled more out-of-pocket spending on education. And that development doesn’t just threaten the CCP’s near-term political standing, but also China’s long-term economic and geopolitical strength.

Thanks in part to the one-child policy’s legacy, China faces a looming demographic crisis. Absent a surge in birth rates, the country’s population in 2100 will be about half its current size. In the interim, a relatively small prime-age labor-force will need to support a massive elderly cohort. To preempt these headwinds to China’s ascent, the CCP has pivoted from the one-child policy to a relatively pro-natalist stance. Yet it’s lifting of the former rule in 2015 did not yield its desired baby boom. Instead, the nation’s exorbitant child-rearing costs helped keep birth rates low.

The crackdown on the tutoring industry is the most conspicuous component of a broader push to reduce household education spending (and thus, political disquiet and obstacles to family expansion). In addition to suppressing capital investment in educational services, the state has also prohibited nonprofit tutoring firms from holding lessons on holidays or during winter and summer vacations. Separately, it plans to mitigate education inequality by expanding a pilot program that rotates teachers and principals between schools.

All of which is to say: Xi is not sabotaging his tech sector in some suicidal act of retribution or self-aggrandizement. Rather, the Chinese state is subordinating the growth and profitability of the digital economy to higher national objectives.

Downsizing the platform economy so as to redirect capital and talent toward high-tech manufacturing appears to be one such objective. Private investors favor consumer-facing tech companies over industrial production. And for good reason. Thanks to globalization, manufacturers tend to face stiff competition; thanks to network effects, social-media firms face little. Manufacturing requires massive investments of fixed capital and the cooperation of large labor forces. Dominant internet platforms can generate windfall profits with relatively few material resources. As The Wall Street Journals Greg Ip notes, Facebook boasts 11 times the market value of the semiconductor manufacturer Micron Technology, even as it employs only 50 percent more people.

But the profit signal isn’t necessarily the wisest steward of economic development. The platform economy is very efficient at generating monopoly rents for capital owners. The social value of its products, however, is often dubious. When Micron Technology gets better at manufacturing semiconductors, a critical input for myriad electronic devices — from smartphones to medical equipment — becomes more abundant. When Facebook gets better at stoking user engagement, workers become less productive and more depressed.

In a speech last year, Xi made clear that he does not share private capital’s reverence for the digital economy, declaring, “It must be recognized that the real economy is the foundation, and the various manufacturing industries cannot be abandoned.” State policy reflects this sentiment. China has only been waging war on its tech sector if one defines that term narrowly: While Tencent and Alibaba have faced the wrath of antitrust regulators, Chinese manufacturers of computer chips, electric-car batteries, and telecommunications equipment have enjoyed subsidies and protection.

There is an alternative.

Whether Xi’s “new development phase” will succeed on its own terms is far from clear. To date, the government’s efforts to promote “common prosperity” look piddling. Forcing tutoring firms to operate as nonprofits will do little to narrow gaps in educational opportunities or ease middle-class families’ financial burdens. Requiring gig companies to pay the minimum wage will not make China’s income distribution any less of an indictment of its putative Marxism. Historically, shared prosperity has rarely been achieved in the absence of a strong, independent labor movement. And brutally suppressing such movements is one of the less-touted pillars of Xi’s “progressive authoritarianism.”

This said, the U.S. government’s response to its analogous economic challenges has been similarly inadequate. The Biden administration has ramped up regulatory oversight of Silicon Valley’s titans. But monopolistic tech firms (with unorganized labor forces) still wield outsize power over America’s economy and politics. Meanwhile, America’s education system is riddled with inequality and rent-seeking. The children of affluent suburbs enjoy better-resourced schools than those of disinvested urban centers. This class divide still maps tightly onto America’s racial one; by some measures, the nation’s schools are more segregated today than they were in 1990. At the same time, extortionary tuition rates have saddled college graduates with unprecedented debt burdens and driven up the typical American family’s education costs by 180 percent since 1995.

American capitalism’s capacity for concentrating income and wealth remains robust. Its ability to prudently direct productive investment is less clear. Over the past 40 years, our private sector’s interest in long-term fixed investment has declined, while its appetite for short-term speculation greatly expanded. Investors are still willing to take risks on well-educated white entrepreneurs with disruptive visions for securing monopoly rents. But “the free-enterprise system” has struggled to adequately finance green technologies, new antibiotics, and myriad other socially vital ends. It has also perennially failed to generate remunerative employment for millions of the nation’s would-be workers. Instead, we have been running the U.S. economy at far below its productive capacity for decades, condemning millions of marginalized laborers to perpetual unemployment in the process.

Justifications of this mode of governance are often fatalistic. Margaret Thatcher famously defended neoliberalism on the grounds that “there is no alternative.” If Chinese policy continues in its current direction, however, liberal capitalism will face its most serious challenge since the Soviet Union’s collapse.

Already, the exigencies of “great power competition” have led Washington to emulate aspects of Beijing’s model. The United States Innovation and Competition Act, which passed the Senate on a bipartisan basis earlier this year, invests $250 billion into a de facto American industrial policy: Rather than trying to delegitimize China’s subsidization of its manufacturing sector on free-trade grounds, the U.S. is now subsidizing its own semiconductor industry. At the same time, the Biden administration is pushing for a far more sweeping set of interventions in America’s political economy, in the name of preventing China from “eating our lunch.”

Whether the imperative to compete with China will serve as America’s long-sought “moral equivalent of war” — binding the nation and legitimizing the economic planning necessary for affecting decarbonization and reviving shared prosperity, at no cost to world peace — or whether it will put us on the path to nuclear conflagration (or to a future that lies somewhere between those two extremes) cannot be known.

It seems likely though that some alternative to business as usual is in the offing. In a context of wrenching inequality and ecological crisis, “progressive authoritarianism,” with its ostensible capacity to redirect economic activity overnight in defiance of moneyed interests, is liable to have some appeal. If liberal democracies do not prove themselves capable of redressing capitalism’s discontents and climatic warming, the “end of history” might not be a happy one for the American way.

China’s Sweeping Crackdown on Big Tech Is a Wake-Up Call